Lender and Borrower as Principal and Agent
AbstractThis paper provides a critical survey of some recent developments in the principal-agent approach to the relationship between lenders and borrowers. The costly state verification model of optimal debt contract is introduced and new results with respect to optimality of standard debt contracts in this model are discussed. Adverse selection in credit markets and its solution with a menu of screening contracts is described and the problems with collateral as a screening instrument are outlined. The dynamic relationship between the lender and borrower is introduced in a soft budget constraint model of default and bankruptcy decisions. Alternative assumptions about informational asymmetries in credit markets are presented as well. For all these topics a number of references from Czech and international economic literature is provided.
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Bibliographic InfoPaper provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its series Working Papers IES with number 2006/24.
Length: 15 pages
Date of creation: Jul 2006
Date of revision: Jul 2006
principal; agent; contracts; credit; adverse selection; moral hazard;
Find related papers by JEL classification:
- C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-12-01 (All new papers)
- NEP-BAN-2006-12-01 (Banking)
- NEP-MIC-2006-12-01 (Microeconomics)
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